Information Services Group(III) - 2023 Q2 - Quarterly Report

FORM 10-Q Filing Information This section outlines the Form 10-Q filing details, registrant status, and common stock outstanding as of July 28, 2023 - The document is a Quarterly Report on Form 10-Q for the period ended June 30, 2023, filed by INFORMATION SERVICES GROUP, INC. (Commission File Number 001-33287)[1] - The registrant is an Accelerated Filer and is not a Large accelerated filer, Non-accelerated filer, Smaller reporting company, or Emerging growth company[1] Common Stock Outstanding | Class | Outstanding at July 28, 2023 (shares) | | :----------------------- | :--------------------------- | | Common Stock, $0.001 par value | 48,557,696 | CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section warns that the report contains forward-looking statements subject to risks and uncertainties, with no obligation to update - This report contains forward-looking statements subject to known and unknown risks, uncertainties, and assumptions that may cause actual results to differ materially from expectations[3] - The company undertakes no obligation to publicly release revisions to these statements and advises readers to review risk factors in SEC filings[3] PART I — FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and related notes for the company ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents the unaudited condensed consolidated financial statements for Information Services Group, Inc. for the periods ended June 30, 2023, prepared in accordance with GAAP and SEC regulations, with all necessary adjustments made for fair presentation Condensed Consolidated Balance Sheets This section presents the unaudited condensed consolidated balance sheets, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheets (Unaudited, In thousands) | ASSETS | June 30, 2023 | December 31, 2022 | | :------------------------------------------ | :-------------- | :---------------- | | Cash and cash equivalents | $19,568 | $30,587 | | Accounts receivable and contract assets, net | 87,377 | 80,170 | | Total current assets | 112,913 | 115,481 | | Goodwill | 94,954 | 94,972 | | Total assets | $238,730 | $243,028 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | 39,531 | 51,191 | | Long-term debt, net of current maturities | 79,175 | 74,416 | | Total liabilities | 135,269 | 142,597 | | Total stockholders' equity | 103,461 | 100,431 | | Total liabilities and stockholders' equity | $238,730 | $243,028 | Condensed Consolidated Statement of Income and Comprehensive Income This section presents the unaudited condensed consolidated statements of income and comprehensive income for the periods presented Condensed Consolidated Statement of Income and Comprehensive Income (Unaudited, In thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $74,609 | $70,701 | $153,095 | $143,264 | | Operating income | 4,863 | 7,148 | 11,913 | 14,880 | | Income before taxes | 3,709 | 6,676 | 8,913 | 13,914 | | Net income | $2,333 | $4,957 | $5,824 | $9,887 | | Basic EPS | $0.05 | $0.10 | $0.12 | $0.20 | | Diluted EPS | $0.05 | $0.10 | $0.12 | $0.19 | | Comprehensive income | $2,166 | $2,689 | $5,980 | $7,085 | Condensed Consolidated Statement of Stockholders' Equity This section presents the unaudited condensed consolidated statement of stockholders' equity for the six months ended June 30, 2023 Condensed Consolidated Statement of Stockholders' Equity (Unaudited, In thousands) - Six Months Ended June 30, 2023 | Metric | Common Stock (Shares) | Common Stock (Amount, In thousands) | Additional Paid-in-Capital (In thousands) | Treasury Stock (In thousands) | Accumulated Other Comprehensive Loss (In thousands) | Accumulated Deficit (In thousands) | Total Stockholders' Equity (In thousands) | | :------------------------- | :-------------------- | :-------------------- | :------------------------- | :------------- | :----------------------------------- | :------------------ | :------------------------- | | Balance Dec 31, 2022 | 49,472 | $49 | $226,293 | $(7,487) | $(9,677) | $(108,747) | $100,431 | | Net income | — | — | — | — | — | 5,824 | 5,824 | | Other comprehensive loss | — | — | — | — | 156 | — | 156 | | Treasury shares repurchased | — | — | — | (3,531) | — | — | (3,531) | | Cash dividends paid | — | — | (4,186) | — | — | — | (4,186) | | Stock based compensation | — | — | 4,654 | — | — | — | 4,654 | | Balance June 30, 2023 | 49,472 | $49 | $221,094 | $(5,128) | $(9,521) | $(103,033) | $103,461 | Condensed Consolidated Statement of Cash Flows This section presents the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 Condensed Consolidated Statement of Cash Flows (Unaudited, In thousands) | Cash Flows From Operating Activities | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net income | $5,824 | $9,887 | | Net cash (used in) provided by operating activities | $(553) | $4,936 | | Cash Flows From Investing Activities | | | | Net cash used in investing activities | $(969) | $(2,104) | | Cash Flows From Financing Activities | | | | Net cash used in financing activities | $(9,524) | $(16,059) | | Net decrease in cash, cash equivalents, and restricted cash | $(10,932) | $(16,055) | | Cash, cash equivalents, and restricted cash, end of period | $19,738 | $31,554 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures for the unaudited condensed consolidated financial statements, covering significant accounting policies, recent acquisitions, revenue recognition practices, earnings per share calculations, income tax impacts, commitments and contingencies, segment and geographical revenue breakdown, financing arrangements, and subsequent events NOTE 1—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS This note describes ISG as a global technology research and advisory firm, detailing its services and strategic vision - Information Services Group, Inc. (ISG) is a global technology research and advisory firm, serving over 900 clients, including more than 75 of the top 100 enterprises in its markets[12] - ISG specializes in digital transformation services (automation, cloud, data analytics), sourcing advisory, managed governance and risk services, network carrier services, technology strategy, change management, and market intelligence[12] - The company's strategic vision, since its founding in 2006, is to be a high-growth provider of information-based advisory services, realized through acquisitions and successful operation of market-leading brands[13] NOTE 2—BASIS OF PRESENTATION This note explains that the unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC regulations - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial statements and pursuant to Form 10-Q and Article 10 of Regulation S-X[14] - Management has made all necessary adjustments (normal recurring accruals) for a fair statement of the financial position, results of operations, and cash flows[14] - Operating results for the three and six months ended June 30, 2023, are not necessarily indicative of the full year's expected results, and these interim statements should be read with the 2022 Annual Report on Form 10-K[14][15] NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines significant accounting policies, including estimates, restricted cash, fair value, and recent pronouncements Use of Estimates This section explains that financial statement preparation involves management estimates and assumptions, which may differ from actual results - The preparation of financial statements requires management to make estimates and assumptions affecting reported amounts, with actual results potentially differing from these estimates[16][17] - Estimates are used for areas such as credit losses, useful lives of assets, goodwill impairment, income taxes, deferred tax asset valuation, and stock-based compensation[17] Restricted Cash This section defines restricted cash as funds committed for rent deposits, unavailable for general corporate purposes - Restricted cash consists of funds committed for rent deposits and is not available for general corporate purposes[18] Fair Value This section discusses fair value measurements for financial and nonfinancial assets and liabilities, including contingent consideration - The carrying value of cash, receivables, accounts payable, and other current liabilities approximated their fair values due to their short-term nature[19] - Fair value measurements are applied to nonfinancial assets and liabilities on a nonrecurring basis, primarily goodwill, intangible assets, and assets/liabilities from business combinations[20] Fair Value Measurements (Unaudited, In thousands) | Basis of Fair Value Measurements | June 30, 2023 | December 31, 2022 | | :------------------------------- | :------------ | :---------------- | | Assets: | | | | Cash equivalents (Level 1) | $18 | $18 | | Liabilities: | | | | Contingent consideration (Level 3) | $4,184 | $5,593 | Change in Contingent Consideration Liability (Six Months Ended June 30, 2023, In thousands) | Metric | Amount (In thousands) | | :------------------------------------- | :----- | | Beginning Balance | $5,593 | | Change 4 Growth contingent consideration payment | (1,460) | | Accretion of contingent consideration | 51 | | Ending Balance | $4,184 | Recently Issued Accounting Pronouncements This section details the adoption of new FASB guidance on credit losses, effective January 1, 2023, and its cumulative-effect adjustment - The company adopted new FASB guidance on credit losses for financial assets, using a modified retrospective approach effective January 1, 2023[25] - This adoption resulted in a cumulative-effect adjustment, increasing accumulated deficit and the allowance for credit losses by $0.1 million[25] NOTE 4—ACQUISITIONS This note details the company's recent acquisitions, Agreemint and Change 4 Growth, outlining their accounting treatment and impact Agreemint Acquisition This section describes the acquisition of Agreemint's assets on March 28, 2022, accounted for as an asset acquisition with fair value in software - On March 28, 2022, ISG acquired substantially all assets of Agreemint, an automated, platform-based contracting solution[26] - The transaction was accounted for as an asset acquisition, with the fair value concentrated in software and related intellectual property rights, which are depreciated over four years[26] Change 4 Growth Acquisition This section details the acquisition of Change 4 Growth on October 31, 2022, including consideration, goodwill, and intangible assets - On October 31, 2022, ISG acquired substantially all assets and assumed certain liabilities of Change 4 Growth, LLC[27] Change 4 Growth Acquisition Consideration and Allocation (In thousands) | Item | Amount (In thousands) | | :------------------------ | :----- | | Cash consideration | $3,450 | | ISG common stock | 600 | | Contingent consideration | 5,560 | | Total allocable purchase price | $9,988 | | Goodwill | $4,360 | - Goodwill was primarily driven by the inclusion of Change 4 Growth's workforce and organizational change management expertise to enhance ISG's Enterprise Change service line[29] Change 4 Growth Intangible Assets and Useful Lives | Amortizable Intangible Assets | Purchase Price Allocation (In thousands) | Estimated Useful Lives | | :---------------------------- | :------------------------ | :--------------------- | | Trademark and trade name | $1,100 | 3 years | | Customer relationships | 2,900 | 8 years | | Noncompete agreements | 300 | 2 years | | Total intangible assets | $4,300 | | NOTE 5—REVENUE This note provides details on revenue recognition, contract balances, and remaining performance obligations, including receivables Contract Balances This section explains how the timing of revenue recognition, billings, and cash collections results in contract assets and liabilities - The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (contract assets), and customer advances/deposits (contract liabilities)[33] Contract Balances (In thousands) | Item | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :---------------- | | Contract assets | $40,307 | $32,249 | | Contract liabilities | 6,902 | $7,058 | - Revenue recognized from the January 1, 2023 contract liability balance was $1.8 million for the three months and $5.3 million for the six months ended June 30, 2023, primarily from subscription contracts[33] Remaining Performance Obligations This section states that as of June 30, 2023, the company had $126.0 million in remaining performance obligations, mostly due within twelve months - As of June 30, 2023, the Company had $126.0 million in remaining performance obligations, with the majority expected to be satisfied within the next twelve months[34] NOTE 6—NET INCOME PER COMMON SHARE This note explains the calculation of basic and diluted earnings per share, including the treatment of anti-dilutive securities - Basic EPS is calculated by dividing net income by the weighted average common shares outstanding, while diluted EPS includes potential dilution from securities convertible into common stock[35] - For the three and six months ended June 30, 2023, 0.6 million and 0.0 million restricted stock units, respectively, were anti-dilutive and excluded from diluted EPS[35] Basic and Diluted Earnings Per Share (Unaudited, In thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (In thousands) | $2,333 | $4,957 | $5,824 | $9,887 | | Weighted average common shares (Basic, In thousands) | 48,476 | 48,160 | 48,457 | 48,343 | | Earnings per share (Basic) | $0.05 | $0.10 | $0.12 | $0.20 | | Diluted weighted average common shares (In thousands) | 50,317 | 50,742 | 50,302 | 51,034 | | Diluted earnings per share | $0.05 | $0.10 | $0.12 | $0.19 | NOTE 7—INCOME TAXES This note provides details on the company's effective tax rates and the factors influencing them for the periods presented Effective Tax Rates | Period | Effective Tax Rate | | :----------------------------------- | :----------------- | | Three Months Ended June 30, 2023 | 37.1% | | Three Months Ended June 30, 2022 | 25.7% | | Six Months Ended June 30, 2023 | 34.7% | | Six Months Ended June 30, 2022 | 28.9% | - The effective tax rate for Q2 2023 was impacted by non-deductible expenses, earnings/losses in foreign jurisdictions, and the vesting of restricted stock units[38] NOTE 8—COMMITMENTS AND CONTINGENCIES This note addresses the company's commitments and contingencies, including the Change 4 Growth contingent consideration liability - The Company is subject to contingencies arising from the ordinary course of business, with all material liabilities properly reflected in the financial statements[39] Change 4 Growth Contingent Consideration This section details the $4.2 million contingent consideration liability related to the Change 4 Growth acquisition and a recent payment - As of June 30, 2023, the Company recorded a $4.2 million liability for the estimated fair value of contingent consideration related to the Change 4 Growth acquisition[40] - In April 2023, a contingent consideration payment of $1.5 million was made[40] NOTE 9—SEGMENT AND GEOGRAPHICAL INFORMATION This note provides information on the company's single reportable segment and its geographical revenue breakdown - The Company operates as one reportable segment, primarily offering fact-based sourcing advisory services across the Americas, Europe, and Asia Pacific[41] Geographical Revenue Information (Unaudited, In thousands) | Region | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $42,273 | $39,448 | $90,680 | $80,885 | | Europe | 24,354 | 23,255 | 47,407 | 46,718 | | Asia Pacific | 7,982 | 7,998 | 15,008 | 15,661 | | Total | $74,609 | $70,701 | $153,095 | $143,264 | - Revenue segregation is based on the location of the legal entity performing services; gross profit or operating income is not measured by geography or service line for operational decisions[42] NOTE 10—FINANCING ARRANGEMENTS AND LONG-TERM DEBT This note details the company's senior secured credit facility, including its amendment, increased revolving commitments, and outstanding debt - On February 22, 2023, the Company amended its senior secured credit facility, increasing revolving commitments from $54.0 million to $140.0 million and eliminating its term loan, with a maturity date of February 22, 2028[43] - The credit facility is secured by equity interests and tangible/intangible assets of the Company and its domestic subsidiaries, with interest rates based on Base Rate or Term SOFR plus an applicable margin[43] - Outstanding borrowings were $79.2 million as of June 30, 2023, and December 31, 2022, with fair values of $79.9 million and $76.5 million, respectively, and the Company is in compliance with financial covenants[44] NOTE 11—SUBSEQUENT EVENTS This note reports no events requiring adjustments to disclosures after the balance sheet date, but notes a new share repurchase authorization and dividend approval - No events occurred after the balance sheet date up to the financial statement issuance date that would require adjustments to disclosures[45] - On August 1, 2023, the Board approved a new $25.0 million share repurchase authorization and a third-quarter dividend of $0.045 per share[46] Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's discussion and analysis of the company's financial condition, liquidity, and results of operations BUSINESS OVERVIEW This section provides an overview of Information Services Group, Inc.'s business, strategic objectives, revenue generation methods, and key factors influencing its operational results. The company focuses on strengthening its market position, developing new services, and expanding geographically, while acknowledging potential impacts from macroeconomic conditions and competition - ISG is a leading global technology research and advisory firm, specializing in digital transformation services, sourcing advisory, and market intelligence[49] - The company's strategy focuses on growing its existing service model, geographical expansion, new industry sectors, productizing market data, expanding managed services, and growth via acquisitions[50] - Revenues are primarily derived from project-based fees (time and materials or fixed-fee) and recurring revenue streams from annuity-based offerings like ISG GovernX, Research, and Software as a Subscription[51][53] - Results are principally impacted by consultant utilization rates, number of business days, and availability of revenue-generating professionals, with potential negative effects from increased hiring and seasonal demand variations[56] RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022 This section details the financial performance for the three months ended June 30, 2023, compared to the same period in 2022, highlighting a 6% increase in total revenues driven by growth in the Americas and Europe. Operating expenses rose by 10%, primarily due to higher contract labor and license fees, leading to a decrease in operating income and net income. Interest expense significantly increased, and the effective tax rate also rose Revenues This section analyzes the 6% increase in total revenues for Q2 2023, driven by growth in the Americas and Europe Geographical Revenue (Three Months Ended June 30, In thousands) | Geographic Area | 2023 (In thousands) | 2022 (In thousands) | Change (In thousands) | Percent Change | | :---------------- | :------ | :------ | :------ | :------------- | | Americas | $42,273 | $39,448 | $2,825 | 7 % | | Europe | 24,354 | 23,255 | 1,099 | 5 % | | Asia Pacific | 7,982 | 7,998 | (16) | (0)% | | Total revenues | $74,609 | $70,701 | $3,908 | 6 % | - Total revenues increased by $3.9 million (6%) for Q2 2023, driven by growth in Advisory, Research, and Network & Software Advisory Services (NaSa) in the Americas, and Automation and Research in Europe[57] - Foreign currency translation negatively impacted performance in Europe and Asia Pacific by $0.1 million[57] Operating Expenses This section details the 10% increase in total operating expenses for Q2 2023, primarily due to higher contract labor and license fees Operating Expenses (Three Months Ended June 30, In thousands) | Operating Expenses | 2023 (In thousands) | 2022 (In thousands) | Change (In thousands) | Percent Change | | :-------------------------------- | :------ | :------ | :------ | :------------- | | Direct costs and expenses for advisors | $45,847 | $41,370 | $4,477 | 11 % | | Selling, general and administrative | 22,330 | 20,885 | 1,445 | 7 % | | Depreciation and amortization | 1,569 | 1,298 | 271 | 21 % | | Total operating expenses | $69,746 | $63,553 | $6,193 | 10 % | - Total operating expenses increased by $6.2 million (10%) for Q2 2023, primarily due to higher contract labor expense ($2.0 million), license fees ($1.1 million), compensation expense ($0.9 million), and non-cash stock compensation ($0.7 million)[58][60] - Depreciation and amortization expense increased by $0.3 million, mainly due to the acquisition of Change 4 Growth[65] Other Income (Expense), Net This section analyzes the $0.7 million increase in total other expenses for Q2 2023, primarily driven by higher interest expense Other Income (Expense), Net (Three Months Ended June 30, In thousands) | Item | 2023 (In thousands) | 2022 (In thousands) | Change (In thousands) | Percent Change | | :------------------------------ | :-------- | :------ | :-------- | :------------- | | Interest income | $97 | $44 | $53 | 120 % | | Interest expense | (1,407) | (610) | (797) | (131)% | | Foreign currency transaction gain | 156 | 94 | 62 | 66 % | | Total other income (expense), net | $(1,154) | $(472) | $(682) | (144)% | - Total other expenses increased by $0.7 million, primarily due to higher interest expense resulting from increased interest rates and a higher debt balance[68] Income Tax Expense This section discusses the increase in the effective tax rate for Q2 2023 to 37.1%, influenced by foreign earnings and non-deductible expenses - The effective tax rate for Q2 2023 was 37.1%, up from 25.7% in Q2 2022, primarily due to the mix of earnings in foreign jurisdictions and the impact of restricted stock unit vesting[69] - The Q2 2023 effective tax rate was higher than the statutory rate due to non-deductible expenses and foreign earnings[69] RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022 This section analyzes the financial performance for the six months ended June 30, 2023, compared to the same period in 2022. Total revenues increased by 7%, mainly driven by the Americas and Europe. Operating expenses grew by 10% due to higher contract labor, license fees, and travel costs. Other expenses significantly increased due to higher interest expense and a write-off of deferred financing costs. The effective tax rate also increased Revenues This section analyzes the 7% increase in total revenues for the six months ended June 30, 2023, primarily from growth in the Americas and Europe Geographical Revenue (Six Months Ended June 30, In thousands) | Geographic Area | 2023 (In thousands) | 2022 (In thousands) | Change (In thousands) | Percent Change | | :---------------- | :------- | :------- | :------- | :------------- | | Americas | $90,680 | $80,885 | $9,795 | 12 % | | Europe | 47,407 | 46,718 | 689 | 1 % | | Asia Pacific | 15,008 | 15,661 | (653) | (4)% | | Total revenues | $153,095 | $143,264 | $9,831 | 7 % | - Total revenues increased by $9.8 million (7%) for the six months ended June 30, 2023, primarily due to growth in Advisory, NaSa, and GovernX service lines in the Americas, and Automation, Research, and GovernX in Europe[70] - Foreign currency translation negatively impacted performance in Europe and Asia Pacific by $2.2 million[70] Operating Expenses This section details the 10% increase in total operating expenses for the six months ended June 30, 2023, driven by higher contract labor and license fees Operating Expenses (Six Months Ended June 30, In thousands) | Operating Expenses | 2023 (In thousands) | 2022 (In thousands) | Change (In thousands) | Percent Change | | :-------------------------------- | :------- | :------- | :------- | :------------- | | Direct costs and expenses for advisors | $95,016 | $85,325 | $9,691 | 11 % | | Selling, general and administrative | 43,000 | 40,472 | 2,528 | 6 % | | Depreciation and amortization | 3,166 | 2,587 | 579 | 22 % | | Total operating expenses | $141,182 | $128,384 | $12,798 | 10 % | - Total operating expenses increased by $12.8 million (10%) for the six months ended June 30, 2023, driven by higher contract labor expense ($4.7 million), license fees ($2.7 million), and travel and entertainment costs ($1.4 million)[71][73] - Depreciation and amortization expense increased by $0.6 million, primarily due to the Change 4 Growth acquisition[78] Other Income (Expense), Net This section analyzes the $2.0 million increase in total other expenses for the six months ended June 30, 2023, due to higher interest expense and deferred financing cost write-off Other Income (Expense), Net (Six Months Ended June 30, In thousands) | Item | 2023 (In thousands) | 2022 (In thousands) | Change (In thousands) | Percent Change | | :------------------------------ | :-------- | :------ | :-------- | :------------- | | Interest income | $181 | $89 | $92 | 103 % | | Interest expense | (3,143) | (1,173) | (1,970) | (168)% | | Foreign currency transaction (loss) gain | (38) | 118 | (156) | 132 % | | Total other income (expense), net | $(3,000) | $(966) | $(2,034) | (211)% | - Total other expenses increased by $2.0 million, primarily due to higher interest expense from increased interest rates and debt balance, and a $0.4 million write-off of deferred financing costs[82] Income Tax Expense This section discusses the increase in the effective tax rate for the six months ended June 30, 2023, to 34.7%, influenced by foreign earnings and non-deductible expenses - The effective tax rate for the six months ended June 30, 2023, was 34.7%, up from 28.9% in the prior year, mainly due to the impact of earnings/losses in foreign jurisdictions and restricted stock unit vesting[83] - The effective tax rate was higher than the statutory rate due to non-deductible expenses and foreign operations[83] NON-GAAP FINANCIAL PRESENTATION This section introduces and defines the non-GAAP financial measures used by management and provided to investors, including adjusted EBITDA, adjusted net income, and adjusted net income per diluted share. These measures exclude certain non-cash and special charges to offer a clearer view of the company's core operations and performance comparability NON-GAAP FINANCIAL MEASURES This section defines and reconciles non-GAAP measures like adjusted EBITDA and adjusted net income, used to evaluate core business performance - Non-GAAP measures include adjusted EBITDA, adjusted net income, and adjusted net income per diluted share, which exclude certain expenses and foreign currency translation impacts[85] - These measures are used by management and provided to investors to evaluate business strategies and performance, improving comparability and transparency by excluding non-cash and special charges[85] Adjusted EBITDA Reconciliation (In thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (In thousands) | $2,333 | $4,957 | $5,824 | $9,887 | | Plus: Interest expense (net of income, In thousands) | 1,310 | 566 | 2,962 | 1,084 | | Plus: Income taxes (In thousands) | 1,376 | 1,719 | 3,089 | 4,027 | | Plus: Depreciation and amortization (In thousands) | 1,569 | 1,298 | 3,166 | 2,587 | | Plus: Non-cash stock compensation (In thousands) | 2,612 | 1,942 | 4,654 | 3,445 | | Plus: Severance, integration and other expense (In thousands) | 1,076 | 340 | 1,342 | 450 | | Adjusted EBITDA (In thousands) | $10,146 | $10,742 | $21,126 | $21,386 | Adjusted Net Income and Diluted EPS Reconciliation (In thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (In thousands) | $2,333 | $4,957 | $5,824 | $9,887 | | Plus: Non-cash stock compensation (In thousands) | 2,612 | 1,942 | 4,654 | 3,445 | | Plus: Intangible amortization (In thousands) | 789 | 527 | 1,583 | 1,055 | | Plus: Severance, integration and other expense (In thousands) | 1,076 | 340 | 1,342 | 450 | | Plus: Write-off of deferred financing costs (In thousands) | — | — | 379 | — | | Adjusted net income (In thousands) | $5,289 | $6,813 | $11,296 | $13,189 | | Adjusted net income per diluted share | $0.11 | $0.13 | $0.22 | $0.26 | LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's financial liquidity and capital resources, outlining primary funding sources, changes in cash and cash equivalents, and details of its senior secured credit facility. It also covers the dividend program, off-balance sheet arrangements, and critical accounting policies, affirming the adequacy of current resources for the next twelve months Liquidity This section identifies primary liquidity sources and explains the $11.0 million decrease in cash, cash equivalents, and restricted cash - Primary liquidity sources are cash flows from operations, existing cash and cash equivalents, and the revolving credit facility[88] - Cash, cash equivalents, and restricted cash decreased by $11.0 million from $30.7 million at December 31, 2022, to $19.7 million at June 30, 2023[89] - The decrease was primarily attributable to net cash used in operating activities ($0.6 million), cash dividends paid ($4.2 million), treasury shares repurchased ($2.0 million), and payments for tax withholding on stock-based compensation ($1.5 million)[90] Capital Resources This section details the amended senior secured credit facility, outstanding borrowings, and the company's compliance with financial covenants - The Company amended its senior secured credit facility on February 22, 2023, increasing revolving commitments to $140.0 million and eliminating its term loan[89][90] - Outstanding borrowings were $79.2 million as of June 30, 2023, and December 31, 2022, with fair values of $79.9 million and $76.5 million, respectively[91] - The Company anticipates current cash and ongoing cash flows will be adequate for working capital, capital expenditures, and debt financing for at least the next twelve months and is currently in compliance with its financial covenants[92][91] Dividend Program This section outlines the company's quarterly dividend program, including the recent approval of a third-quarter dividend - In May 2023, the Company announced a quarterly dividend of $0.045 per share, expecting a total cash dividend of $0.18 per share for the four quarters ending June 30, 2024[93] - On August 1, 2023, the Board approved a third-quarter dividend of $0.045 per share, payable September 28, 2023[93] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet financing arrangements, liabilities, guarantee contracts, or material variable interests - The Company does not have any off-balance sheet financing arrangements, liabilities, guarantee contracts, or material variable interests in unconsolidated entities[94] Recently Issued Accounting Pronouncements This section refers to Note 3 for information on recently issued accounting pronouncements - Refer to Note 3 for information on recently issued accounting pronouncements[95] Critical Accounting Policies and Accounting Estimates This section states that there have been no material changes to critical accounting estimates since the 2022 Annual Report on Form 10-K - There have been no material changes or developments in the evaluation of critical accounting estimates and underlying assumptions since the Annual Report on Form 10-K for the year ended December 31, 2022[97] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This section provides quantitative and qualitative disclosures regarding the company's exposure to market risks Interest Rate Risk This section addresses the company's exposure to interest rate fluctuations, noting that all outstanding debt is based on a floating rate. Despite this, the company believes its total exposure is limited due to its debt to EBITDA ratio and forecasted rates - As of June 30, 2023, the Company had $79.2 million in total debt principal outstanding, all based on a floating interest rate (SOFR)[98][99] - Despite exposure to interest rate increases, the Company believes its total exposure is limited due to its debt to EBITDA ratio of 1.8 times and external bank forecasts[99] Foreign Currency Risk This section outlines the company's foreign currency risks, including translation and transaction risk from foreign-denominated transactions - A significant portion of revenues are derived from sales outside the U.S., exposing the Company to foreign currency translation and transaction risk, primarily in Euro, British Pound, and Australian dollar[100] - Translation risk arises from converting foreign currency assets and liabilities into USD, with adjustments deferred to stockholders' equity; historically, this has not materially impacted consolidated earnings[101] - Transaction risk occurs when transactions are denominated in a currency different from the local functional currency, with gains or losses recorded in current period earnings; in 2022, the impact on revenues was $12.7 million (4.4% of revenues), which was not material[102] Credit Risk This section addresses the company's credit risk, primarily concentrated in cash equivalents and accounts receivable, mitigated by diverse customers - Concentration of credit risk primarily exists in short-term, highly liquid investments (cash equivalents) and accounts receivable/contract assets[103] - Credit risk is limited due to the majority of cash and cash equivalents being held with large investment-grade commercial banks and a diverse customer base across geographies[103] ITEM 4. CONTROLS AND PROCEDURES This section details the company's disclosure controls and procedures and internal control over financial reporting, confirming their effectiveness Disclosure Controls and Procedures This section confirms that the company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023 - Disclosure controls and procedures are designed to ensure information required for SEC reports is recorded, processed, summarized, and reported timely[104] - Management, including the CEO and CFO, evaluated the effectiveness of these controls as of June 30, 2023, and concluded they were effective[104] Internal Control Over Financial Reporting This section states that there have been no material changes to the company's internal control over financial reporting during the fiscal quarter - There have been no changes in internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[105] PART II - OTHER INFORMATION This part includes other information such as legal proceedings, risk factors, equity security sales, and recent developments ITEM 1. LEGAL PROCEEDINGS This section states that there are no legal proceedings to report for the company - There are no legal proceedings to report[108] ITEM 1A. RISK FACTORS This section indicates that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - The risk factors included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, have not materially changed[109] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the company's dividend program and share repurchase activities, including a new authorization Dividend Program This section outlines the company's quarterly dividend program, including the recent approval of a third-quarter dividend - In May 2023, the Company announced a quarterly dividend of $0.045 per share, with an expected total cash dividend of $0.18 per share for the four quarters ending June 30, 2024[110] - On August 1, 2023, the Board approved a third-quarter dividend of $0.045 per share, payable September 28, 2023[110] Issuer Purchases of Equity Securities This section details the new $25.0 million share repurchase authorization and the equity securities purchased during Q2 2023 - On August 1, 2023, the Board approved a new share repurchase authorization for an additional $25.0 million, effective upon completion of the current program, which had approximately $3.6 million remaining as of June 30, 2023[111] Issuer Purchases of Equity Securities (Three Months Ended June 30, 2023, In thousands) | Period | Total Number of Securities Purchased (shares) | Average Price per Security ($) | Total Numbers of Securities Purchased as Part of Publicly Announced Plans (shares) | Approximate Dollar Value Remaining Under Plan (thousands $) | | :---------------- | :----------------------------------- | :--------------------------- | :------------------------------------------------------------------------ | :------------------------------------------------------------------------------ | | April 1 - April 30 | 311 | $5.07 | 311 | $4,874 | | May 1 - May 31 | 127 | $5.13 | 127 | $4,223 | | June 1 - June 30 | 120 | $5.06 | 120 | $3,616 | ITEM 5. OTHER INFORMATION This section includes other relevant information, specifically recent developments regarding changes in the company's executive leadership Recent Developments This section reports executive leadership changes, including the retirement of the CFO and the appointment of a successor - Humberto 'Bert' Alfonso, Executive Vice President and CFO, plans to retire on August 7, 2023[115] - Michael A. Sherrick joined as Executive Advisor, Finance on July 24, 2023, and will become Executive Vice President and CFO effective August 8, 2023, upon Mr. Alfonso's retirement[115] ITEM 6. EXHIBITS This section lists the exhibits filed as part of this report, including employment letters, certifications, and XBRL formatted financial statements - The report includes exhibits such as Michael A. Sherrick's Employment Letter, CEO/CFO Certifications (31.1, 31.2, 32.1, 32.2), and Inline XBRL formatted financial statements (101, 104)[116] SIGNATURES This section contains the official signatures of the company's authorized officers, confirming the filing of the report - The report is signed by Michael P. Connors, Chairman of the Board and Chief Executive Officer, and Humberto P. Alfonso, Executive Vice President and Chief Financial Officer, on August 8, 2023[120]